Thursday, May 23, 2013

economic loss doctrine doesn't bar New Jersey consumer fraud claim

Francis E. Parker Memorial Home, Inc. v. Georgia-Pacific LLC, --- F. Supp. 2d ----, 2013 WL 2177974 (D.N.J.)

Parker sued GP on behalf of a putative class alleging violations of the New Jersey Products Liability Act (PLA); breach of express warranty; and the New Jersey Consumer Fraud Act (CFA).  Parker alleged that GP misrepresented the quality of its exterior trim, PrimeTrim, which prematurely deteriorates and promotes the growth of mold, insects, etc. in the structures on which it’s installed.  GP allegedly knew this as early as 1998 and acknowledged it internally, but didn’t stop advertising the product for a wide range of uses without explaining that specially exacting installation was required.  GP allegedly rejected known design improvements due to their cost, while failing to test new versions of PrimeTrim and failing to test in actual installations despite the importance of such information.  GP’s allegedly false claims included that PrimeTrim: “offers up to four times more decay resistance than lumber[;]”“outperformed lumber through two years of direct exposure to sun, rain, and snow[;]” has “more than fifteen years with a track record of proven performance[;]” “[f]eatures superior moisture and decay resistance[;]” and was “proven in over four years of laboratory and field testing.” GP denied Parker’s warranty claim under its express warranty on the ground that the trim was misinstalled; Parker alleged that GP failed to provide adequate installation instructions, particularly omitting instructions on how to seal and prime site-cut ends despite knowing and intending that PrimeTrim would be cut to size on site.

Parker brought its claims on behalf of a damages class, with an economic loss damages subclass for property in which the PrimeTrim had been damaged but not other property.  The allegations relating to the subclass included that PrimeTrim’s failure typically began with its own deterioration, only later exposing other elements of the building to damage.

GP moved to dismiss the CFA claim as preempted/subsumed by the PLA.  The court denied the motion.  Economic losses due to harm to the product itself are recoverable under the CFA, whereas they are explicitly exempted from the PLA’s definition of harm to property: “physical damage to property, other than to the product itself.” A product liability action is “any claim or action brought by a claimant for harm caused by a product, irrespective of the theory underlying the claim, except actions for harm caused by breach of an express warranty.”

The Third Circuit has already examined the interaction between the PLA and the CLA in a case seeking failure to warn and design defect damages, plus a CFA claim for unconscionable consumer practices. Estate of Edward W. Knoster v. Ford Motor Co., 200 Fed. Appx. 106 (3d Cir. 2006). The court of appeals found no overlap.  The plaintiffs sought only economic damages resulting from the harm to the product itself, and the PLA excludes those damages from its definition of “harm,” so the CFA claim wasn’t a “product liability action”: “The PLA cannot subsume that which it explicitly excludes from its coverage.”

The New Jersey Supreme Court has said that, in order to overcome the presumption that the CFA applies to a covered activity, a court must be satisfied that there’s a direct and unavoidable conflict between application of the CFA and some other regulatory scheme, showing a legislative intent not to subject parties to multiple regulations that will work at cross purposes.  Lyle Real v. Radir Wheels, Inc., 198 N.J. 511 (2009).  A mere possibility of incompatibility is insufficient, given the importance of the CFA in combating fraud.

The court found that the CFA and PLA claims weren’t incompatible, at least not at this stage.  (Given the conclusion about “harm” here, how could they ever be as long as Parker restricted its economic damages claims to the value of the trim product itself?)  The degree to which consumers experienced damage to the PrimeTrim but not to adjacent materials was as yet unclear.  GP argued that the damage to the PrimeTrim would eventually cause rot to the adjacent structures, and “were damage to a class member's PrimeTrim to spread to adjacent property, the claims may arguably be in direct conflict.”  But there was no indication “that the Legislature intended to foreclose today's fraudbased remedies by providing a remedy for a tort-based harm which may or may not materialize in the future.” 
People who bought based on misrepresentations, but who hadn’t yet experienced harm to adjacent materials, “would have to sit on their rights and wait for the harm to spread to adjacent structures,” and that might bar relief altogether based on complications of notice inquiry/tolling the statute of limitations.  (I would think that if they didn’t have a complete cause of action today, the limitations period couldn’t run, but New Jersey is weird about limitations periods.)  Other cases have reasoned similarly, e.g., Rehberger v. Honeywell, No. 11–0085, 2011 U.S. Dist. LEXIS 19616 (M.D. Tenn. Feb. 2011) (“[T]he relevant harm was the plaintiff's decision to purchase the [product], which was caused by the defendant's alleged misrepresentations and omissions, not by the product. Indeed, this harm occurred before the plaintiff ever operated the [product]. Because the plaintiff has not asserted any ‘product liability’ claims, his claims are not subsumed by the PLA.”).

GP’s attack on Parker’s CFA standing was also premature.  Parker alleged that it bought the product at issue and suffered an injury in fact based on that purchase; its warranty claim was denied.  “Whether or not Parker will need to amend the pleading … to identify an adequate subclass representative is a question for another day.”

The court continued to find that Parker properly pled unlawful affirmative acts, knowing misrepresentations and unconscionable commercial practices under the CFA, but not regulatory violations.  GP argued that no misrepresentations were made to Parker, only to builders, subcontractors, and agents.  But Parker alleged misrepresentations within the 30-year express warranty, which was given to Parker; the allegations of misrepresentations to others were part of explaining why the product was defective and GP knew it.  Specificity isn’t required for specificity’s sake, but to put a defendant on notice of the precise misconduct with which it is charged, and the allegations here did so. 

Parker argued that the express warranty provided the crux of its CFA claim; the court didn’t reach whether lack of privity with regard to builders etc. would render the CFA inapplicable, but noted that the CFA explicitly covered both direct and indirect acts. Perth Amboy Iron Works, Inc. v. Am. Home Assur. Co., 226 N.J. Super. 200 (App. Div.1988), aff'd, 118 N.J. 249 (1990) (affirming the CFA's coverage of “acts of remote suppliers, including suppliers of component parts, whose products are passed on to a buyer and whose representations are made to or intended to be conveyed to the buyer”).

Parker also sufficiently alleged knowing concealment of a material fact with the intention that the consumer rely on the concealment. Actual reliance wasn’t required, only a causal nexus between an unlawful act and an ascertainable loss.  New Jersey implies a duty to disclose where that’s necessary to make a previous statement true. The complaint clearly alleged that GP knew of the defect and that “GP's senior sales personnel, over GP's own technical personnel's objections, actively sought to conceal these facts, continued to advertise to the contrary, and intentionally opted not to adopt available product improvements known to be effective, solely due to cost.”

GP then argued that its conduct didn’t qualify as an unconscionable commercial practice, one forbidden type of act in addition to fraud/deception/misrepresentation.  Unconscionability is an amorphous concept.  Breach of warranty isn’t per se unconscionable without substantial aggravating circumstances. Relevant factors include whether a supplier took advantage of a consumer’s inability to protect her interests; whether the price was grossly excessive compared to market prices; and whether the supplier made a misleading statement of opinion on which the consumer was likely to rely to her detriment.  This wasn’t clear before discovery, so the court denied the motion to dismiss.

However, the court found that Parker hadn’t properly pled a violation of the CFA due to regulatory violations; this kind of liability was strict. Rather than alleging violations of regulations promulgated pursuant to the CFA, Parker alleged that violations of other laws—here, the construction code—were actionable.

New Jersey courts have found CFA claims actionable when premised on violations of laws and rules independent of the CFA where the conduct evidenced unconscionable commercial practice. But a violation of the construction code in and of itself wasn’t actionable under the CFA.  And Parker only vaguely and generally asserted violations of parts of the code; this was inadequate.

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